Despite the continuation of recent volatility that has characterised movements in stock markets over the past few months, it looks like we could be set for another positive week for European markets, after yesterday’s positive session and another strong rebound in US markets.
This would be the third successive week in succession that we’ve managed to finish higher in Europe and suggest that, despite concerns about an escalation in trade tensions, as well as a possible break-out of hostilities in the Middle East, that stock markets may well be starting to carve out some form of short term base.
US markets have managed to hold above their 200-day MA’s this week further helping to underpin global stock prices, after President Trump dialled back on his rhetoric of imminent missile strikes, with a tweet that suggested that a military strike may not be as imminent as first thought, if in fact it comes at all. This was reinforced later by comments from US defence secretary James Mattis saying that no decision had yet been taken on a response, military or otherwise, though prospective targets had been discussed.
There was also some chatter that some form of agreement on NAFTA might well be forthcoming in the coming days which has also helped limit some downside risk, while reports overnight that President Trump had told his advisors to re-examine the case for re-entering the (TPP) Trans Pacific Partnership but only if it were on terms “substantially better than the deal to President Obama”
It would be naïve in the extreme to suggest that the events of the last 24 hours means that the threat of an escalation of geopolitical factors has passed, but for now while the background noise is driving the short-term direction as markets gyrate higher and lower, recent price action might suggest that we could look to head towards the upper end of the trading range in the coming days, particularly if US earnings come in ahead of expectations, starting today with JP Morgan and Citigroup who enjoyed some decent gains yesterday ahead of their latest numbers later today.
The better tone for European equities was also helped by a weaker euro after the release of the latest ECB minutes which showed that policymakers were concerned about the risks to the economy of the effects of the higher euro on the ability of the central bank to hit its inflation target. There was also concern that the stimulus exit plan might well be undermined in the event of a further deterioration of trade relations between China and the US.
The weaker euro and the slightly more confident tone in markets, helped lift the US dollar in the wake of this weeks Fed minutes helping it retest the highs for the week against the Japanese yen, with US treasuries also selling off, helping to pushing 10-year US yields to their highest levels this month.
The pound was also a beneficiary of the euro’s slide hitting a nine month high in the process as traders mulled the prospect of a rate hike from the Bank of England next month.
In data released overnight China posted its first trade deficit in US dollar terms in over a year as exports for March slid sharply by 2.7%. This was a significant miss from expectations of a 11.9% rise and well down from the 44.5% rise seen in February. Imports rose by 5.9% well below an expected rise of 12.4%, slightly below February’s 6.3% rise. While one month’s data isn’t a concern and could be put down to seasonal factors, the big variations in the export numbers do raise a concern that either trade war worries or a slowdown in global demand might be behind the rather large miss.
EURUSD – ran into resistance at the 1.2400 level earlier this week, before drifting back, keeping the broader 1.2200/1.2500 range intact. We need to see a break below 1.2160 or a break above 1.2540 to suggest a strong move in either direction.
GBPUSD – the 200-week MA at 1.4250, remains a key barrier for the pound, with a break targeting a potential move to this year’s peak at 1.4350 and potentially 1.4500. We have support at 1.4080 as well as the 1.3970 area.
EURGBP – yesterday’s break below the 0.8700 area opened up a move to a new 10 month low and could well signal further losses on a break below 0.8640 towards the 0.8300 level and 2017 lows. Only a move back above 0.8750 would stabilise and suggest a return to the 0.8800 area.
USDJPY – has made several attempts to break through the 107.50 area over the last five days so far without success. A failure to move above 107.50 retargets the support at 106.60, with support also at 105.20. A move through 107.50 retargets that 108.20 area. The 105.20 area remains a key support with a break below 105.00 opening up a move towards 103.00.